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How Far Could Current Bear Market Go In Light Of Powell's Economic Projections?

www.investing.com/analysis/how-far-could-current-bear-market-go-in-light-of-powells-economic-projections-200630191
How Far Could Current Bear Market Go In Light Of Powell's Economic Projections?
By Francesco Casarella/Investing.com   |  Sep 22, 2022 11:25AM ET
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  • Powell expects Fed rates at 3.4% to 4.4% this year and 3.8% to 4.6% in 2023
  • With that projection, the Fed funds futures forward curve peaks right around May 2023
  • The average bear market for the S&P 500 lasts 16 months with a -35% drawdown

Jerome Powell's speech after yesterday's 75 bps interest rate hike announcement lasted only a few minutes but gave us a lot to think about.

First, the Chairman focused heavily on containing inflation, which must reach the 2% target according to him—a rather farfetched goal in the current scenario.

Then, he went on to provide some projections both on the employment and economic growth side of the U.S. economy between now and 2025, specifically:

  • Fed rates at 3.4% to 4.4% this year and 3.8% to 4.6% in 2023
  • Real GDP growth at +0.2% (from previous estimate of +1.7%) and 1.2% in 2023
  • Inflation: PCE expected at 5.4% this year, 2.8% in 2023, 2.3% in 2024
  • Unemployment rate at 3.8% this year, 4.4% in 2023 and 2024

Below, we can see the Fed funds futures forward curve based on Powell's projections:

Fed Funds Rate Forward Curve
Fed Funds Rate Forward Curve

Source: Chicago Mercantile Exchange

The projections anticipate the peak of the rate hike cycle around May 2023, so we can consider seven more months of stock market pain ahead of us. However, let's remember that the markets are an anticipatory indicator, so it is likely that we can start seeing a price recovery even before this peak.

Furthermore, Powell's speech sounded slightly optimistic for the first time in a while, implying that the "light at the end of the tunnel" could come before that (understood as the end of the rate hike cycle).

Market Reaction

While markets initially reacted very well to the speech—with gains of more than 1% for the S&P 500 and NASDAQ Composite—the current bearish mood eventually prevailed, driving major indexes deep into negative territory.

So what should we expect in the coming weeks/months?

I believe the investor should always reason by scenario analysis (positive and negative). Given that an adverse scenario remains the most likely amid the continuation of the tightening cycle, let's look at the length and magnitude of drawdowns of all previous recessionary periods and major stock market crises:

Recession-Related S&P 500 Drawdowns
Recession-Related S&P 500 Drawdowns

Consider that as of today, we have a year-to-date drawdown (using the S&P 500 index as reference) of around 20% that has lasted for nine months.

The worst drawdown in history occurred in 2008, with a 50% drop amid the Global Financial Crisis, but let's remember that the entire global financial system was on the verge of a collapse back then.

Apart from two exceptions in history—with declines above 40% and a duration of 20 to 23 months—the average scenario implies that a bear market drop should range between 30% to 40% and last 16 months.

Assuming that the current decline will last until the end of the Fed rate hike cycle, that brings us right around 16 months—if we consider January 3, 2022, as the start.

So, coming back to the present day, compiling Fed fund's projections with the average historical bear market drawdown, the most likely scenario would be a further 10%-15% drop in the S&P 500 over the course of the next seven months.

Will that scenario play out? No one knows. However, that is what I am preparing for by holding 13%-15% cash in my portfolio to be deployed bit by bit if the markets break below the mid-June lows.

Should those same lows represent the bottom of this bear market? All the better for everyone.

Disclosure: The author is long both on the S&P 500 and the NASDAQ Composite.

How Far Could Current Bear Market Go In Light Of Powell's Economic Projections?
 

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How Far Could Current Bear Market Go In Light Of Powell's Economic Projections?

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Comments (18)
Herbert Schiskin
Herbert Schiskin Sep 24, 2022 9:40AM ET
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Focus on policy makers, even though we have inflation they keep spending lots more, to get sympathy from poor people, tho they know that they are making everybody poorer in the process thru inflation AND they have Powell to get all the blame.
Ma Lu
Ma Lu Sep 23, 2022 2:22PM ET
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Don't know where these numbers come from but the FED has announced much higher numbers of inflation for 2023.
Tony Ab
Tony Ab Sep 23, 2022 1:22AM ET
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Time in market matters way more than timing it . I got all time in world
Glenn Ebersole
Glenn Ebersole Sep 22, 2022 10:05PM ET
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2008 was a US manufactured crisis led by Lehman not global. US led the crisis and made a global drag. This time is different with full global economy involved.
John Lakran
John Lakran Sep 22, 2022 10:05PM ET
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War stops covid stops supply eases, oil eases and back tk growth we will be. This is a leadership crisis and im betting the market will end up the same as the past hundred years higher than now in the future
Adamo Nals
Adamo Nals Sep 22, 2022 7:43PM ET
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Not even close to reality. I don’t know how old you are. But I was investing in trading in the late 70s and the 80s. This is so much worse. Back then was one inflationary pressure oil. Now we have hundreds of a inflationary pressures and hundreds of other headwinds with zero tail wins. On top of 9 trillion on the balance sheet $205 a share times 15 X equals 3075. And in this environment with rates where they are the S&P should be no higher than 13 X to 14 X so really 2800 is where we’re going for sure. And that’s very generous. Unless you were an investor in the 90s or before you wouldn’t understand. And the younger people who only know 2008 2022 even the worst because they think 0% interest rates and unlimited QE is normal. This is so many problems. All culminating to Mr. Piper is in the building and it’s time to pay the tab after 15 years of a failed federal reserve experiment. Mic drop. Period.
Glenn Ebersole
Glenn Ebersole Sep 22, 2022 7:43PM ET
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Agree and maybe 1800 as a bottom to bounce from.
Charles Foster
Charles Foster Sep 22, 2022 7:40PM ET
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@CasinoCrypt: you are spot on my friend.
Casino Crypt
CasinoCrypt Sep 22, 2022 7:02PM ET
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people forget that the 2008 crash was never resolved . Massive amounts of QE stopped cardiac arrest. The attempted corrections since then have been cancelled with more morphine injections.  We truly have made a monster and that's why the 20% correction currently is a red line and why the treasury uses a proxy trading desk to hold the Dow Jones support zone  at 30400 . If the Dow falls below 29100 it will start to generate massive shock waves through the financial world like we have never seen.  The same applies to the SP 500 .
Adamo Nals
Adamo Nals Sep 22, 2022 7:02PM ET
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Well that’s a guarantee and you can take that to the bank. We will definitely break those levels. The NASDAQ is still up 750% since 2011. We priced in 40 years of stock gains in the last 10 years. That’s all I have to say.
trevor hron
trevor hron Sep 22, 2022 4:45PM ET
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It seems with so many things there are a lot of factors going on around the world, the inflation and Fed fund rates shooting higher. It seems like having a higher cash position would be more beneficial with so many unknowns. The T Bills are great but what happens when the market starts to normalize? They bills you bought at $110 will tank even more if the United States Starts having a harder time selling those bonds the could quickly change in value. The nice thing at the moment is the interest rate should continue to go up. Have to see how it plays out.
Chris Dollar
Chris Dollar Sep 22, 2022 4:19PM ET
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Honestly, that‘s pretty non-sensical. Wouldn‘t you want to add some macro comparison to those other times? Or is that too demanding? Rubbish as it is.
Gus McCrae
Gus McCrae Sep 22, 2022 4:19PM ET
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why would you add macro? he's basically saying, forget macro, play probability and probability says this and that, regardless of macro
Sterling Lightside
Sterling Lightside Sep 22, 2022 4:16PM ET
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S&P to ZERO by tomorrow at lunch. Even then it is overvalued. Never forget who the president is.
John Hill
John Hill Sep 22, 2022 4:16PM ET
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Who's the president? Joe somebody, right? Actually he has shown himself to be Joe Nobody. As effective as a hay rake without tynes.
Jimmy Doodoo
JimmyD Sep 22, 2022 4:16PM ET
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Let's go Brandon!
 
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